Inflation rose in January to 3.8 per cent, raising expectations of another rate rise

Interest rates may need to rise higher and more often as the “apathetic” strategy to control inflation continues to struggle, a leading economist has warned.

Headline inflation for the month of January rose 3.8 per cent, unchanged in the 12 months to December, while trimmed mean rose to 3.4 per cent on a year-over-year basis, latest official figures show.

Trimmed mean inflation, which strips out volatile assets, is the Reserve Bank’s preferred measure.

Rising from 3.3 per cent in December to 3.4 per cent in January has pushed it further from the RBA’s target band of 2-3 per cent.

Aside from that, the Australian Bureau of Statistics’ monthly CPI print on Wednesday broadly aligned with economists’ expectations.

It was tipped that lower fuel and travel prices would offset last month’s bump to headline inflation wrought by government energy subsidies ending.

The ABS said the largest contributors to annual inflation were housing, food and recreation.

RBA ‘playing with fire’

Reacting to Wednesday’s data, Judo Bank chief economic adviser Warren Hogan said the RBA was “a little bit behind curve” and warned of “a situation where inflation becomes entrenched and they have to chase it”.

“That means they have to just keep raising rates until the economy goes into recession,” he told Sky News.

“That would be a disaster, but that’s what they’re leaving us exposed to with this very apathetic strategy to inflation.”

The RBA raised the rate by 25 basis points to 3.85 per cent at its February meeting, but has indicated that it won’t move again till its May meeting.

Mr Hogan also called out government spending, saying “it’s quite clear” that state and federal spending was “playing a big role”.

“If they could just cool their jets for one year it would have an impact, I think,” he said, adding that he thought the chances of that happening were “pretty slim”.

“So I think we’re playing with fire in this economy.

“The risk is that at some stage in the next year 18 months, rates have to go up by a lot more than we ever needed them to.

“If they’d just been a bit more pre-emptive and a bit more assertive earlier.”

Betashares chief economist David Bassanese said Wednesday’s data would worry cash-strapped mortgage holders.

“Although the monthly CPI figure should be taken with a grain of salt due to uncertain seasonal factors, the January CPI result does not bode well for those Australians hoping not to see another rate increase from the RBA,” he said.

Australia's Cash Rate 2022

He said more concerning was the broadbased nature of price increases, including across hospitality and housing, which the RBA was likely to attribute to demand factors.

“Although there are two months to go before the more comprehensive March quarter CPI release, the omens do not bode well for a downside inflation surprise at this stage,” Mr Bassanese said.

“As a result, assuming a quarterly inflation gain of 0.8 per cent or more for the March quarter, it seems likely the RBA will raise rates again in the May policy meeting.”

MLC senior economist Bob Cunneen agreed the RBA would consider the broadbased nature of the data.

“This is a concern for the Reserve Bank, as it shows persistent inflation that is well above their 2-3 per cent target,” Mr Cunneen said.

“Accordingly, the Reserve Bank’s finger remains on the interest rate trigger, given these persistent price pressures.

“Another interest rate rise is on the horizon for Australia.”

The Reserve Bank anchors policy on quarterly prints but Wednesday’s print will serve as a pulse check as the RBA tries to force trimmed inflation into its target range.

The RBA will make its next rates decision on March 17.

Chalmers under pressure on government spending

Addressing media in Brisbane, Treasurer Jim Chalmers was asked if scaling back government spending could help ease inflation faster.

He insisted Labor had already “cut spending in all of our budgets”.

“Part of that has been winding back spending where we can in order to make room for other priorities, but also to deliver two surpluses to deliver a $235bn turnaround in the budget,” Mr Chalmers told reporters.

“People can expect, in our fifth budget in May, that there will be more savings, just like there have been savings in the first four budgets, as well.”

He also said the RBA had forecast inflation would remain at its current level until mid this year.

“One of the reasons for that, as I said before, is the withdrawal of the Commonwealth’s energy rebates,” Mr Chalmers said.

“The Reserve Bank has made it clear on a number of occasions that there are temporary and persistent pressures in these numbers, and that it remains to be seen, the composition of temporary and persistent pressures.”

Government watching inflation ‘closely’

Ahead of the data release, Finance Minister Katy Gallagher said the government was watching closely.

“We did see last month that inflation ticked up a little and we saw largely as a result of some of those temporary energy rebates coming off that influenced those,” she told ABC radio.

“The job for the government remains the same, being conscious that the decisions we make right for the economic circumstances of the time.

“So we’ll see what that data says, and we’ll make decisions based around that.”

Last month’s release showed headline inflation jumped 3.8 per cent in the year to December.

That was up from 3.4 per cent in the month before.

Meanwhile, trimmed mean inflation also edged up from 3.2 per cent to 3.3 per cent.

The figures prompted the Reserve Bank to hike the official cash rate to by 25 basis points to 3.85 per cent.